Dear RBI, It's Not About Hoarding Notes, It's About Shortage of Cash - Vivek Kaul's Diary
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Dear RBI, It's Not About Hoarding Notes, It's About Shortage of Cash

Dec 12, 2016

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In the press conference that followed the monetary policy on December 7, 2016, R Gandhi, one of the deputy governors of the Reserve Bank of India(RBI), said: "We reiterate that there is adequate supply of notes and hoarding of notes helps nobody's cause."

The impression that the RBI is trying to create is that all is well and that it is the hoarders are responsible for the mess that prevails on the cash front, all through the country. But is that really the case?

In a press release dated December 8, 2016, the RBI said: "During the period from November 10, 2016 and December 7, 2016, banks have reported that banknotes worth Rs 4,27,684 crore have been issued to public either over the counter or through ATMs."

The total value of the Rs 500 and the Rs 1,000 demonetised notes amount to Rs 15.44 lakh crore. Hence, the notes replaced amount to close to 27.7 per cent of the demonetised notes. Before the notes had been demonetised the total value of currency stood at Rs 17.87 lakh crore. This basically means that around 23.9 per cent of the currency that was in circulation before demonetisation has been replaced.

Hence, around one-fourth of the currency is back in circulation. The question is why doesn't it feel like one-fourth? Why does it continue to be difficult to carry out cash transactions? The answer is straightforward.

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To replace the Rs 500 and Rs 1,000 demonetised notes, the government printed the Rs 2,000 note, first. This means that there is no note between Rs 100 and Rs 2,000. Hence, every time one tries to spend the Rs 2,000 note, it is tough going because the other party simply doesn't have enough change going around.

This, despite the fact that the RBI has supplied: "lower denomination of the notes, that is Rs 100, Rs 50, Rs 20 and Rs 10... over its counters," as well. In fact, it has supplied 19.1 billion pieces of denomination of these notes over the last one month. As deputy governor Gandhi put it "This is more than what the Reserve Bank had supplied to the public in the whole of the last three years."

While the RBI said that a total of 19.1 billion pieces of notes of small denomination were printed, it doesn't provide us with a breakdown of numbers. It doesn't tell us how many Rs 100 notes were printed, how many Rs 50 notes were printed and so on. Hence, there is no way of finding out the total value of these notes that had been printed.

Nevertheless, it is safe to say that the total value of the lower denomination notes printed and pumped into the economy, would essentially amount to around 5-6 per cent of the total currency in circulation before demonetisation. Hence, the bulk of the notes printed have been Rs 2,000 notes. Given this, there isn't enough change going around, which means even those who have Rs 2,000 notes are finding it very difficult to use it.

What this means is that the 23.9 per cent figure of the total amount of currency replaced in comparison to the currency in circulation before November 8, 2016, when demonetisation was carried out, is overstated to that extent.

There is another problem with the Rs 2,000 note. There is a huge rumour going around that it has been launched as a stop-gap arrangement and is likely to be demonetised soon. This rumour perhaps comes from what was mentioned in the press release accompanying the demonetisation decision. As the press release said: "High denomination notes are known to facilitate generation of black money... Infusion of Rs 2,000/- bank notes will be monitored and regulated by RBI." It is well worth remembering that the original motive of demonetisation was to tackle black money and fake notes.

How will the situation play out in the days to come? Will things improve by the end of this month as the prime minister has repeatedly told the nation? As Urjit Patel said during the course of the monetary policy press conference: "What we have done over the last two weeks is recalibrated our production towards the 500 and the 100." This is going to improve the situation a little, given that as more 500s hit the market, the chances of the 2,000s being accepted will also go up, as more change becomes available.

Having said that it will take some time for the situation to get back to normal. With 500s and 100s being printed the rate of currency replacement will slow down. It takes four 500 rupee notes to replace the currency that one 2,000 rupee could.

Further, it is worth remembering here that the capacity of the printing presses supplying RBI with notes is around 300 crore notes per month. This, when the presses work 24 hours a day and for the full month.

The total number of 500 rupee notes demonetised stand at 1,716.5 crore. At 300 crore notes a month, it will easily take five to six months to replace the total lot. Even if all the notes are not printed, given the push towards cashless, it will be a while before there is enough cash going around in the economy.

Hence, the point is that people are not hoarding cash. There simply isn't enough cash going around. But what about all the raids all across the country and the cash being found during these operations? Isn't that hoarding cash? Yes. Nevertheless, these seizures at best amount to a few hundred crore, which is a minuscule part of the overall currency that has been printed and pumped into the economy. At times, one does get excited looking at absolute numbers, but to put things in a proper perspective, it always makes sense to look at percentages.

To conclude, currency or cash is not the only form of money going around. There are other forms as well. Nevertheless, for a country where 98 per cent of the consumer transactions happen in cash, cash remains the major form of money. How difficult it is to understand this basic fact?

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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31 Responses to "Dear RBI, It's Not About Hoarding Notes, It's About Shortage of Cash"

N Rajan

Dec 16, 2016

It is not about understanding the 'Basic fact" of above 90% cash transaction alone.
It is also about changing the very norms of doing transactions which was vitiating the very 'System'.... it has gone too far.. only drastic steps can make a change, if at all..

Like (1)

Sriram Das

Dec 14, 2016

It is a proven fact that not only the chosen few who were privy to this 'demononetisation' move but also the most important agency, the RBI lacked foresight to anticipate the havoc that it will inflict on the masses. To brush away the misery caused to people by saying that people should adopt a cashless form of transaction is akin to offering a lollipop to a hungry child crying for milk.
A very cogent, logical and compelling analysis by Vivek Kaul. Hope the FM, Governor of RBI and last but not the least the bureaucrats are listening.

Like (1)

B. Yerram Raju

Dec 14, 2016

It is the distribution mechanism that failed. In the first place the RBI should not have released the lower denomination notes to the acclaimed and acknowledged net savvy banks like the HDFC, ICICI, Citi, Stan Chart, Axis. The PSBs who had the largest numbers of customers in retail and personal banking segments got most the Rs.2000 notes in large numbers. It is of course true that there is no sense in replacing all the Rs.500 and Rs.1000 notes demonetised as it will defeat the very purpose of such a move. But if the replacement is 23.9% as claimed and another 23% in CRR lock-up, the clamour from the public would not have been so high as we see reflecting in unending ques before the bank branches and non-functioning ATMs. RBI just did not have a clue of what was happening at bank branches as it was busy in transporting cash and concentrating on how best to meet the situation. All that the Dy.Governors says is only in hindsight. It is a proven fact now they lacked foresight in dealing with the massive change. Cultural shift to cashless society has to wait.
You go to a barber, a vegetable vendor in the street, a pushcart eatery and offer a Rs.2000 bill and enjoy the fun. Can you give him a POS or put him on PayTM or e-wallet and ask him to realise his earning for making his daily spend?
A staunch protagonist who has been advocating demonetisation of the two denominations since 2011 when the quantity of such notes was small and when inflation was razing at 8.5%, as I am, fully disappointed with the bad planning and refusal on the part of the FM and the RBI to see the realities on the ground to change their strategy to a more citizen friendly initiative.
Bandwidth at many places the POS inoperative when cards are swiped!! Networks do not just work. Out of 6lakh villages hardly 1.8 lakh villages have some modicum of networking and the required bandwidth. Speaking on mobile phones is different from accessing the internet for transactions when there are traffic jams all the way. It is time that people in power realise the stark realities and mend their ways of re-engineering the economy to a less cash economy. see more on my blog.

Like (1)

Suresh Kabra

Dec 13, 2016

In my family & friend circle, we have both service and business class people. While we service class people hardly deposited approx 25 to 30 thousand Rs in our bank accounts, business class struck with hordes of cash. They approached us to help them in this difficult time and deposit upto 2 lacs of their money in our account. Some obliged them. Others like me refused. We are not on talking terms now. This may be story of thousands of families in our country. After 08 Nov, there was no change in our withdrawal pattern, others increased their withdrawal by almost 400% to oblige these wrong doers. This is only one side of the coin. Other side is wrong doing by bank officials. During first 15 days, cash was available in banks & most of us were able to get our monthly requirement of upto Rs24000/-, though there was long queue. However from third week onwards money simply vanished from banks. We were told that cash has not arrived by Axis & HDFC banks; while others were given cash by these very same branches. Those who got cash were well connected people like our landlord. Banks officials started playing dirty and in bargain were making lots of profit for themselves. This incident was about a fortnight ago. We were sure of mischief by bank people. Now stories on TV have confirmed the same. I hardly see any bank officials being grilled by media for their wrong doing. Why chairmen of Axis & HDFC banks have been spared by media, if their branches were involved in blatant corrupt practices? Media is focusing all their attention only on Govt & RBI to make this scheme fail because they themselves are equally corrupt. I would have been happy to see you commenting what Govt should be doing next to stop it.

Like (1)

s Ramji

Dec 13, 2016

thanks to situation created by
modifying govt, people who have
cash and would have normally
deposited cash in bank are
hesitant to do so, as they feel
they may have to stand in long
que to withdraw cash. they
prefer to have cash in hand
than deposit it in bank.
theoretically if all SB holders
draw rs 24000 twice a month and
all current a/c holders draw rs
100000 a month, will banks be
able to dispense cash easily?

Like (1)

jatin

Dec 13, 2016

I think RBI intent is not to communicate that all is well. Also it will not be fair to assume that Govt or RBI want to replace all the notes which were in circulation. If 86% of notes is withdrawn, I think intent is to not replace all that with new notes. It will not serve the purpose of less cash society.

Like (1)

Rajendra

Dec 12, 2016

I think it is quite wrong to say that there is simply not enough notes to go around. Every day we here of crores of new currency being confiscated from hoarders. I feel that lack of notes have been created by hoarders who with the help of corrupt bank officials have managed to swap new for old. How many thousands of crores that officials will never catch or yet to catch is an unknown factor. Fact is crooks who are always ingenious have once again outsmarted our govt for the time being. The cat & mouse game is on.

Like (1)

Jawahar

Dec 12, 2016

'But what about all the raids all across the country and the cash being found during these operations?'Probably here lies the answer. ATMs are dry whereas crores of new notes are being seized from personal possessions. It appears that there are chances of leaksge in the process of filling the ATMs with cash.

Like (1)

rajendra

Dec 12, 2016

every change in this country looks so difficult that policy makers simply afraid to make a change even with good intention. It looks so difficult because there are more than enough people in this country to make it look difficult with their intelligent and brilliant analyzing skills.

Still great changes happens in India as we have great leaders like Indira Gandhi, Narendra Modi and many other great leader who took brave steps and brought India to this stage. India still believes in strong leaders like Narendra Modi.

Yes its very simple to understand that replacing entire money demonetized will take a very long time , may be more than 6 to 9 months. But its also important to understand that the objective of demonetization must not be replacing all the demonetized notes. If its what government intention also, then it will be done in 3 or less given 2000 will replace 2 1k notes or 4 500 notes. In terms of transacting with 2000, yes its very difficult given people can not get it changed for small transactions. So people are going through difficult time from this perspective and I am hope it will short lived. Given more of 500 and 100 notes soon enter the system, this problem will subside soon. Except rural areas where cashless seems to be still a dream, the tier 2 and tier 3 already converting to cashless this including paper wala, dood wala, chai wala thats the beauty of our country that common public ready to accept change for better India but the biased people always present it otherway and try to confuse, influence the community around them.
If we take rural areas, their transaction power any way less, this is very clear if one takes in account of rural migration to tier2 , 3 and metros. They hardly spend , may be less than 2500 rs per month or even less except for big purchase that they do once or twice a year. Even though its a short term inconvenience in rural areas, it will disappear soon.. remember rural areas people are suffering not due to unavailability of notes instead they are suffering due to unavailability of wealth and wealth creation opportunities. Even now , during this case crisis, rural area people less worried about notes as its nothing in front of problem they are already facing. The average money they keep in their home are less than 200 or nothing, the 500 note still a big note for them so banning 500 and 1000 may not even bother them. So where do they keep money.. no where. They do not do daily cash transactions. For example, if farmer selling milk every day they collect money only once in a month and that directly goes to post office in their small saving schema and remaining directly go to kirana store or other store owners who they owe money during their purchases in that month. Similarly their crop sale, fertls purchases etc.. If one lived in rural areas they will know rural areas transactions work and how much cash they hold at given point in time. Indirectly rural areas are already cashless and cash is being transacted as group through one vendor or one institution. So one vendor is suffering due to demonetization not entire rural area people. So if one person find a solution that will solve one village issues and I am sure this one person is smart enough to deal with this cash crisis.
Given these common sense thinking and ignoring sophisticated and biases analyzing skills by smart people, i would say the demonetization will definitely bring the case portion in the system and impact would be short lived, normalcy would return even before media stops talking about it. But common send thinking long term benefit would be , this would definitely make illegal activities less possible especially political cash funding thus look more difficult hence political parties cries too much about it. Similarly, difficult for media houses who blackmail big shorts holding proofs of their illegal acts or media houses who get funded by political parties for reading biased news. This is the reason many media houses trying to exaggerate the situation and trying damn hard to prove its failure thus by putting the pressure on govnt to remove withdraw limits so they get cash funded as usual. This is very unfortunate that I find equity master throwing analysis same as some of these illegal funded media houses. Though I agree partially with equity master analysis, I strongly feel you are trying to influence reader and make your point that demonetization is a failure by posting negative analysis about it every day. very disappointed.

Like (5)

Hemant Athavale

Dec 12, 2016

1)Your arithmetic is incorrect. About 2.4lakh crores of lower denomination notes remained in circulation. So available currency is about 33% and not 23 as claimed
2) government was already printing ₹2000 notes for last few months so it should not take 6 months but may be ( I do not have figures) 3
3) Hoarding may not be the only reason but it is also a reason otherwise how do you explain various news paper reports

Like (4)
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